When buying or selling real estate, signing a contract is one of the most crucial steps in the process. A real estate contract is a legally binding agreement between the buyer and seller that outlines the terms and conditions of the property transaction. It’s essential to understand the finer details of these contracts to avoid unexpected surprises or legal complications down the road. Whether you’re a first-time homebuyer or a seasoned investor, here are several key aspects to review before you sign any real estate contract.
1. The Parties Involved
The first thing to check in a real estate contract is the identification of the parties involved. This typically includes the names of the buyer(s) and seller(s), and it’s essential to ensure that the parties listed are accurate. Incorrect or incomplete names can lead to issues with the title transfer or ownership in the future. Pay close attention to the details, especially if you’re working with a trust or a business entity as the buyer or seller.
2. Property Description
A detailed description of the property being bought or sold is crucial. This should include the legal address, the property’s boundaries, and possibly even a legal description (often found in a survey report). Make sure this matches the details you were provided earlier, especially if the contract specifies land or structural details that could affect your future use or resale of the property. Any discrepancies here could cause confusion during closing or even invalidate the deal.
3. Purchase Price and Deposit
One of the most important terms of the contract is the purchase price. The contract should clearly state the agreed-upon price for the property. Additionally, the contract will outline the deposit or earnest money amount, which shows the buyer’s commitment to the purchase. Typically, this amount is a percentage of the total purchase price, and it’s held in escrow until the deal closes. Make sure the deposit amount is accurate and reflects what was discussed. If you’re unsure, consult with your real estate agent or lawyer before signing.
4. Financing Contingencies
Most buyers need financing to purchase a home, so it’s important to check for any contingencies related to obtaining a loan. A financing contingency clause allows the buyer to back out of the deal if they are unable to secure financing within a specified time frame. Make sure this clause clearly outlines the type of loan you need (e.g., FHA, conventional), the deadline for securing it, and any conditions under which the financing contingency can be activated. This will protect you if you encounter financing issues during the process.
5. Inspection Contingencies
A home inspection contingency is one of the most important protections for the buyer. This clause gives the buyer the right to have the property professionally inspected within a set period. If the inspection reveals any major defects, the buyer may request repairs, negotiate a price reduction, or walk away from the deal without penalty. Make sure the contract includes a reasonable time frame for the inspection and clearly outlines the process for addressing any discovered issues.
6. Closing Date
The contract should specify a closing date – the date when the ownership of the property will officially transfer from the seller to the buyer. This date is crucial for both parties because it sets expectations for when the transaction will be finalized. It’s important to make sure this date works with your schedule, as delays can affect your move-in plans or financing arrangements. If the date needs to be adjusted, you can negotiate with the other party before finalizing the contract.
7. Earnest Money
Earnest money is a deposit made to demonstrate a buyer’s good faith in a real estate transaction. It’s typically held in an escrow account until the deal is finalized. However, if the buyer decides to back out without cause, they risk losing this earnest money. Ensure that the contract specifies the amount of earnest money, the conditions under which it will be refunded, and how it will be applied toward the purchase price. This helps to clarify the financial commitment and reduce misunderstandings later on.
8. Title and Ownership
A real estate contract should include information about the property’s title and ownership. This ensures that the seller legally owns the property and has the right to sell it. The title report will also indicate if there are any liens, judgments, or claims against the property that could complicate the sale. The contract should specify that the seller must clear any title issues before the transaction can proceed. If there are concerns about the title, it’s essential to address them early in the process to avoid complications at closing.
9. Closing Costs
Closing costs are additional expenses that come with buying or selling a property. These can include things like title insurance, property taxes, home inspections, attorney fees, and loan origination fees. The real estate contract should outline who is responsible for paying each of these costs. Typically, the buyer is responsible for most of the closing costs, but there can be negotiations regarding who pays for what. Make sure the contract clearly details these costs and confirms that both parties are in agreement.
10. Repairs and Condition of the Property
The condition of the property at the time of sale is an important aspect of the contract. The contract should specify whether the property is being sold “as is” or whether the seller is agreeing to make certain repairs. If repairs are needed, the buyer may request specific work or negotiate a price reduction. It’s important that any agreed-upon repairs or maintenance be outlined in the contract in clear, specific terms, including deadlines for completion.
11. Closing Date and Possession
The contract will typically specify when the buyer will take possession of the property. This is the date when the buyer will be able to move into the home or take control of the property. Sometimes, the buyer and seller might negotiate a leaseback agreement, allowing the seller to remain in the home for a period after the closing. Be sure that possession details are clearly defined in the contract, including any temporary occupancy by the seller or other unusual circumstances.
12. Additional Clauses and Special Requests
Sometimes, specific terms or requests might need to be included in the contract, such as seller concessions, repairs, or additional contingencies. If you have any special conditions – for example, needing to sell your current home before buying the new one – be sure these are explicitly stated in the contract. These additional clauses can significantly affect the timeline and process of your real estate transaction, so it’s important that nothing is left out or assumed.
13. Dispute Resolution
In the event that a dispute arises between the buyer and seller, it’s crucial to understand how conflicts will be resolved. The contract may include a clause outlining arbitration or mediation procedures in case of disagreements. These methods can often be quicker and less expensive than going to court. Make sure the dispute resolution process is clearly outlined and that both parties understand their obligations if an issue arises.
14. Deadlines and Timelines
Real estate contracts often include important deadlines for various steps in the process, such as securing financing, completing inspections, or closing the deal. These deadlines are essential because they create a structured timeline for the entire process and ensure that both parties meet their obligations. Be sure that all deadlines are reasonable and achievable based on your circumstances. Missing a deadline could result in the contract being voided or losing your deposit.
15. Seller’s Disclosures
Sellers are often required to disclose certain information about the property, such as past repairs, environmental hazards, or issues like mold, pest infestations, or structural damage. Make sure that the contract includes a section about these disclosures, and review them thoroughly before proceeding. If any issues are discovered, you may be able to renegotiate the price or ask the seller to make repairs.
16. Final Walkthrough
Before closing the deal, the buyer is typically allowed to do a final walkthrough of the property. This is an opportunity to ensure that all agreed-upon repairs have been completed and that the property is in the condition specified in the contract. The final walkthrough should occur shortly before the closing, and the contract should include provisions regarding any issues that may arise during this inspection. If something is wrong or damaged, you can negotiate with the seller to address these concerns before finalizing the sale.
17. Legal Review
Finally, before signing a real estate contract, it’s always a good idea to have a lawyer review the agreement. Legal professionals can help identify any terms that may be problematic or not in your best interest. They can also assist with negotiating terms that better align with your goals and legal protections. Even if you feel confident about the contract, having an expert review it can provide peace of mind and prevent issues in the future.
Understanding and reviewing a real estate contract thoroughly is key to ensuring a smooth and successful transaction. By paying close attention to these details, you can protect yourself from potential pitfalls and make the buying or selling process much easier. Remember, this is a legal document that can have long-term consequences, so don’t rush through it. Take the time to ensure that every term is fair and in your best interest before you sign.